The Morningstar Wide Moat Focus Indextracks companies that earn Morningstar Economic Moat Ratings of wide and whose stocks are trading at the lowest current market prices relative to our fair value estimates.
Wide-moat companies carry sound balance sheets and significant competitive advantages—two desirable qualities in the face of today’s economic uncertainty.
How has this collection of undervalued wide-moat stocks performed this year? Pretty well: The Morningstar Wide Moat Focus Index outperformed the broad-based Morningstar US Market Index for the year to date by more than 4 full percentage points as of Sept. 22, 2023. The undervalued wide-moat stocks included in the index beat the broader market for the trailing one-, three-, five-, and 10-year periods, too.
With those performance numbers on the index’s side, its constituents are a fertile hunting ground for long-term investors looking for high-quality stocks trading at cheap prices.
10 Most Undervalued Wide-Moat Stocks to Buy
These were the 10 most undervalued stocks in the Morningstar Wide Moat Focus Index as of Sept. 22, 2023:
- Etsy ETSY
- International Flavors & Fragrances IFF
- Walt Disney DIS
- Estee Lauder EL
- Teradyne TER
- Equifax EFX
- U.S. Bancorp USB
- Zimmer Biomet ZBH
- Nike NKE
- Wells Fargo WFC
The most undervalued wide-moat stock on the list, Etsy, was trading 56% below our fair value estimate as of Sept. 22, while the last company on the list, Wells Fargo, was trading 32% below our fair estimate. We think all 10 of these names are high-quality stock ideas for long-term investors to consider.
To keep the index focused on the least-expensive high-quality stocks, Morningstar reconstitutes the index regularly. The index consists of two subportfolios containing 40 stocks each, many of which are overlapping positions. The subportfolios are reconstituted semiannually in alternating quarters on a “staggered” schedule.
Morningstar reevaluates the index’s holdings and adds and removes stocks based on a preset methodology. Because stocks are equally weighted within each subportfolio, the reconstitution process also involves rightsizing positions.
After the most recent reconstitution, half the portfolio added 10 stocks and eliminated 10 stocks.
10 Undervalued Stocks Added to the Morningstar Wide Moat Focus Index
These undervalued stocks were added to the reconstituted subportfolio of the Morningstar Wide Moat Focus Index on Sept. 15.
|Agilent Technologies A||Healthcare|
|Campbell Soup CPB||Consumer Defensive|
|Charles Schwab SCHW||Financial Services|
|Corteva CTVA||Basic Materials|
|Estee Lauder EL||Consumer Defensive|
|Honeywell International HON||Industrials|
|Keysight Technologies KEYS||Technology|
|MarketAxess Holdings MKTX||Financial Services|
|Nike NKE||Consumer Cyclical|
|RTX Corporation RTX||Industrials|
The undervalued wide-moat stocks added to the index hail from a variety of sectors. Three sectors—consumer defensive, industrials, and financial services—each had two names added to the subportfolio during September. Of the three sectors, however, only financial-services stocks as a group look undervalued today, trading about 10% below Morningstar’s fair value estimate for the sector as of this writing.
10 Stocks Removed From the Morningstar Wide Moat Focus Index
These stocks were removed from the reconstituted subportfolio of the Morningstar Wide Moat Focus Index on Sept. 15.
|Adobe ADBE||Technology||Price/Fair Value|
|Constellation Brands STZ||Consumer Defensive||Price/Fair Value|
|Domino’s Pizza DPZ||Consumer Cyclical||Price/Fair Value|
|Emerson Electric EMR||Industrials||Price/Fair Value|
|Intuit INTU||Technology||Price/Fair Value|
|Lam Research LRCX||Technology||Price/Fair Value|
|Meta Platforms META||Communication Services||Price/Fair Value|
|Polaris PII||Consumer Cyclical||Market Cap|
|ServiceNow NOW||Technology||Price/Fair Value|
|Workday WDAY||Technology||Price/Fair Value|
Stocks can be removed from the index for a few different reasons: if we downgrade their economic moat ratings, if their market capitalizations fall beneath a certain level, or if their price/fair value ratios rise significantly. Nearly all of the stocks removed from the subportfolio during the latest reconstitution were pushed out by stocks that were trading at more attractive price/fair value ratios at the time of reconstitution. That being said, the stocks that were removed shouldn’t always be considered stocks to sell, especially when the removed stocks are still trading in what we’d consider a buying range. They’re just not as undervalued as the stocks added to the index at the time of the reconstitution.
Notably, half of the stocks removed from the wide moat index’s subportfolio in September are technology stocks; as a group, tech stocks have risen a remarkable 36% for the year as of this writing.
What Are Wide-Moat Stocks?
Morningstar thinks that companies with wide economic moats have significant advantages that allow them to successfully fend off competitors for decades. Companies can carve out their economic moats in a variety of different ways—by having high switching costs, through strong brand identities, or by possessing economies of scale, to name just a few.
Over time, we’ve found that the strategy of investing in wide-moat stocks trading at a discount to their fair values has been an effective approach to stock investing. Read more about the approach in “How to Find Stocks Poised to Outperform.”
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